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Executive summary

The smartphone is the most successful consumer device ever. Deloitte predicts that one billion smartphones will be purchased as upgrades for the first time in 2015, generating over $300 billion in sales.

The quantity of smartphones bought as upgrades is unparalleled among consumer electronics devices. In 2015 smartphone sales will be greater in units and revenues than the PC, television, tablet and games console sectors combined. What’s more, according to Deloitte’s research, undertaken in May-June 2014, about seven in ten smartphone owners in 14 developed markets had upgraded their phone in the previous 18 months. This is more frequent than for any other consumer electronics device, which may surprise in view of the fact that in 2015 most smartphone owners are likely to spend more time looking at TV screens, and information workers and students may spend more time looking at PC screens. However, the smartphone is the most personal of consumer electronics devices: the most constant companion, the most personal of choices, the most customized and reflective of the owners, the least likely to be shared with other users, and the most frequently looked at.

In addition, the huge production volumes of smartphones manufactured make this the most competitive market among devices, undergoing the most substantive technical improvement on a year-by-year basis. Assessing the smartphone upgrade market from a purely technical perspective, it might be concluded that most existing owners do not ‘need’ a new device. But this assessment is too narrow; there is a wide spread of motivations, practical and emotional, which will drive the billion upgrades we anticipate for 2015 and the 1.15 billion for 2016.

In many cases, the timing of an upgrade will be linked to the expiry of a contract, a price reduction, or a sales promotion. But the decision to actually upgrade a phone, and the choice of which model to upgrade to, will likely have been driven by a variety of factors, including:

One billion smartphone upgrades

Deloitte predicts that one billion smartphones will be purchased as upgrades for the first time in 2015, generating over $300 billion in sales1. We expect smartphone upgrade volumes to continue increasing through 2018, and possibly beyond.

The quantity of smartphones bought as upgrades is unparalleled among consumer electronics devices. In 2015 smartphone sales will be greater in units and revenues than the PC, television, tablet and games console sectors combined. The smartphone’s share of units and revenue should continue growing through 2018.

The smartphone’s predominance is driven mainly by upgrades. The smartphone base is forecast to increase from 1.8 billion in 2014 to 2.2 billion this year. We expect smartphone sales of about 1.4 billion smartphones in 2015, which implies that just over a billion (about three-quarters) will be upgrades. According to Deloitte’s research, undertaken in May-June 2014, about seven in ten smartphone owners in 14 developed markets had upgraded their phone in the previous 18 months. This is more frequent than for any other consumer electronics device, which may surprise in view of the fact that in 2015 most smartphone owners are likely to spend more time looking at TV screens, and information workers and students may spend more time looking at PC screens.

However, the smartphone is the most personal of consumer electronics devices: the most constant companion, the most personal of choices, the most customized and reflective of the owners, the least likely to be shared with other users, and the most frequently looked at.

Indeed, Deloitte’s research found that respondents in many countries chose the smartphone as the device they were most likely to purchase in the next 12 months, with a third expecting to buy a smartphone, compared to 21 percent for laptops and 19 percent for tablets.

The huge production volumes of smartphones manufactured also make this the most competitive market among devices, undergoing the most substantive improvement on a year-by-year basis. Our view is that the device replacement cycle for smartphones is the shortest relative to other devices.

Some may question the need for users to swap one small rectangular and expensive slab for another. Arguably there is little perceptible benefit in upgrading from a quad-core to an octa-core device; 3G is good enough and 4G unnecessary; there is little noticeable difference between a 12 MP (megapixel) and 20MP photo, or between a high definition and 4K screen; wide-angle lenses that take better selfies aren’t needed; and square corners are not superior to rounded ones (or vice versa).

Assessing the smartphone upgrade market from a purely technical perspective, it might be concluded that most existing owners do not ‘need’ a new device. But this assessment is too narrow; there is a wide spread of motivations, practical and emotional, which will drive the billion upgrades we anticipate for 2015 and the 1.15 billion for 2016.

In the near term smartphones will offer both an ever-wider range of functionality (such as a fingerprint sensor) and enhancement in existing functions (such as a better camera).

At first glance, fingerprint readers may appear superfluous. They enable us to do things (such as unlock phones, authenticate an in-app payment, gain access to enterprise email, or authorize an in-store contactless purchase) that we can already do with passwords and PINs.

But fingerprint readers make each step faster and slicker: a single touch of a reader is, for some users, more elegant than multiple taps of a touchscreen. This is also where one-upmanship comes in, and envy may drive the decision to upgrade. A fingerprint reader enables people do things slightly differently from others whose phones lack a reader, as well as being superior from a practical perspective.

The camera is a core functionality of smartphones, as well as the feature phones that preceded them. We expect that a common (but rarely ever sole) reason for upgrading a phone will be to take and share better photographs, from anywhere in the world.

Every year the photographic capability of smartphones improves. 4G enables faster sharing; better sensors enable improved low-light photos; wider lens apertures let in more light, making possible the shooting of slow-motion video. Faster processors and micro-actuators reduce the blur from camera shake. The latest flashes offer a more natural light, lessening the chance of ‘bleached’ faces, or washed-out balsamic glaze on the second course of a fancy meal. Filters change the mood.

All these enhancements result in photos more worthy of sharing; and faster connectivity speeds enable and encourage us to distribute them more frequently and in higher resolution. A panoramic photo is about eight megabytes in size, and takes mere seconds to share at 4G speeds. A generation back, holiday snaps could only be inflicted on friends and family post-vacation.

Better cameras may trigger upgrades to get more memory. Although this may seem logical, it is arguably irrational, if we exhaust memory only because we are averse to deleting un-needed snaps. A 64-gigabyte (GB) phone can store over 30,000 high definition photos, few which will be looked at again.

Some of the practical motivations for upgrading may not be picked up by standard, questionnaire-based market research. A common reason for upgrading in 2015 will be to get a larger screen, ostensibly to browse more easily, or watch more video. Few might admit however that the principal benefit of a larger screen is to avoid the need to put on reading glasses.

This year, a common complaint among smartphone users will be that their device ‘feels slow’. This will be fact as well as perception: smartphones used frequently for data applications tend to last about four years before becoming too slow to operate. Phone hardware is locked down and generally can’t be upgraded; but the software used on the device, including the operating system (OS), is upgraded at least annually. New software, be it an OS or an app, is designed for the majority of phones likely to use it and pay for it. Every year, the newest smartphones incorporate faster processors and more random access memory (RAM); so over time, as software becomes more complex, the processor and memory in a device increasingly struggle to undertake existing and new functions.

Upgrading a smartphone on the basis of looks may seem superficial, but this decision can also be rationalized. Better-quality materials – whether metals, plastics or even bamboo – are now being used, and these can make devices more durable as well as more eye-catching. New screens tend to be stronger, and also to have better viewing angles, as well as superior visibility in sunlight. Many smartphone models are now dust- and water-resistant.

Peer pressure is likely to be a factor in many decisions to upgrade. It’s not just the envy invoked from seeing friends and family with pristine new devices, replete with brand new functionality; it’s also the news flow, with some new smartphone launches dominating the tech sections of websites and also national news bulletins. Added to that is pestering from children, eager for their parents to upgrade so as to get an upgraded hand-me-down smartphone for themselves.

In many cases, the timing of an upgrade will be linked to the expiry of a contract, a price reduction, or a sales promotion. But the decision to actually upgrade a phone, and the choice of which model to upgrade to, will likely have been driven by many of the aforementioned factors, as well as many other impulses. Vendors and carriers should be aware of them all.

Bottom line

The smartphone is the most successful consumer device ever: the landmark of a billion upgrades in a single year is testament to this.

Just being in the smartphone industry, however, is no guarantee of success, and the market is becoming increasingly competitive. The challenges for smartphone vendors: retaining loyalty, taking share in a maturing market, maintaining margin, and determining which functionality their customers want at each point in time, are likely to get steadily more acute over time.

In addition to optimizing hardware, vendors will need to increment the range of intangible factors used to enhance their devices’ appeal. These range from the availability of technical support, to the ease of transferring data between the old and new devices and from the perceived security of client data to the caliber of the accompanying app store.

Vendors need to ensure that all functionality addresses current needs and anticipates latent ones. Incorporating superfluous functionality, or technology that is hard to use, will diminish profitability.

Offering cameras with ever-higher resolution may offer quality increments that few owners would be able to discern; whereas incorporating better low-light capability may have wider appeal, as the improvement would be more immediately noticeable.

Smartphone vendors should continue to work closely with carriers. In markets with subsidies and two-year contracts, upgrades have both advantages and disadvantages for operators. They need to fund the upfront device cost, or offer the ability to pay in installments, but the upgrade also gives them a chance to lock in a customer, reduce churn and perhaps even sell them upgraded service levels. In markets with no subsidies, the vendors need to optimize pricing and features in order to appeal to retailers and consumers.

For purchases of the few hundred million smartphones by enterprises, the selection process can be more complex than for consumers. CIOs are unlikely to care too much about the need for a smartphone optimized for sharing holiday snaps; but the HR department may want to offer such devices to attract and retain staff. In some cases, phones that are more resilient and waterproof may be perfect for field workers; and for companies needing additional security, fingerprint readers and NFC chips may be of particular interest.

TMT Predictions 2015

TMT Predictions 2015

TMT Predictions 2015

2015 TMT Predictions authors

Partner, Global Head of Research

Paul Lee is a UK Partner and the Global Head of Research for the technology, media, and telecommunications (TMT) industry at Deloitte. In his global role, Paul has authored over 80 TMT reports includi... More

Director of research, TMT

Duncan is the Director of Technology, Media and Telecommunications Research for Deloitte Canada. He is a globally recognized speaker and expert on the forecasting of consumer and enterprise technology... More

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